No GST on MNCs ESOPs to employees of Indian arm

No GST on MNCs ESOPs to employees of Indian arm


No GST on ESOPs, ESPPs, and RSUs: Employee stock option plans (ESOPs), employee stock purchase plans (ESPPs), and restricted stock units (RSUs) offered by foreign firms to their employees in India will not attract Goods and Services Tax (GST), provided certain conditions are met.


GS-03 (Economy)

Key highlights:

  • Benefit to MNCs: This exemption benefits multinational companies (MNCs) such as Google, Microsoft, Oracle, and Walmart, as well as a large number of tech companies and other MNCs whose Indian employees receive these stock options.
  • Previous Tax Disputes: Many MNCs and start-ups had been facing tax demands and were involved in litigation regarding the taxability of these ESOPs. The new circular aims to resolve these disputes.
  • Additional Charges Subject to GST: If a foreign holding company charges an additional amount beyond the cost of securities/shares to the domestic subsidiary, GST will be applicable on this additional amount. The domestic subsidiary will have to pay GST on a reverse charge basis in such cases.
  • Expert Opinions: Experts believe that the new circular will end disputes between the tax department and Indian companies. They suggest that the circular provides clarity and a favorable impact for MNCs and their subsidiaries in India.
  • Application to Indian Holding Companies: The circular is primarily focused on arrangements between foreign holding companies and Indian subsidiaries. However, it is suggested that similar arrangements between Indian holding companies and their subsidiaries could also benefit from this clarification.

Employee Stock Option Plan (ESOP):

  • An Employee Stock Option Plan (ESOP) allows employees to purchase company shares at a predetermined price, known as the “exercise price” or “strike price.”
  • It is used to attract, retain, and reward employees, aligning their interests with the company’s growth.

Key Features of ESOP:

  • Purpose: ESOPs help companies attract, retain, and reward employees, promoting alignment with company success.
  • Granting of Options: Employees are given the right, but not the obligation, to buy shares at a set price, typically discounted from the market price, after a certain vesting period.
  • Regulations:
    • Unlisted Companies: Must follow the Companies Act, 2013, and Companies (Share Capital and Debentures) Rules, 2014.
    • Listed Companies: Must comply with Securities and Exchange Board of India (SEBI) guidelines.
  • Eligibility:
    • Permanent employees working in India or abroad.
    • Directors (excluding independent directors).
    • Employees or directors of subsidiary, holding, or associate companies.
  • Exclusions:
    • Employees who are promoters or belong to the promoter group.
    • Directors holding more than 10% of the company’s shares, directly or indirectly.
  • Exceptions:
    • The above exclusions do not apply to startup companies for the first ten years from their incorporation.